Charlemagne

The divisiveness pact

Plans for closer economic integration in the euro zone could cause trouble

“WHY are you trying to show divisions? Are we getting in your way? You are humiliating us.” Such were the bitter words that Donald Tusk, the Polish prime minister, hurled at the leaders of Germany and France in February when they set out their “competitiveness pact”, a plan for closer economic integration, complete with separate summits for the euro zone.

He had reason to worry, to judge by the humiliation in store at the meeting of European Union leaders in Brussels on March 11th. Over lunch at the Justus Lipsius building, the 27 EU heads of government were due to hold an emergency debate on north Africa. In the afternoon Mr Tusk, David Cameron of Britain, Fredrik Reinfeldt of Sweden and seven others were supposed to go home, leaving the 17 euro-zone leaders to discuss how best to salvage the single currency. Would the outsiders go quietly, satisfied by assurances that the competitiveness pact will be open to all—even if they were barred from the first night? Might some try to prolong the foreign-policy debate to sabotage the euro-zone summit? Indeed, might some just refuse to leave the room? One way or another, the sovereign-debt crisis is pushing euro-zone countries into deeper integration. Unless the process is handled with care, the day of separate summits may come to be seen as the moment when the euro zone uncoupled from the rest of the EU.

The surprise may perhaps be that this separation took so long. The deepest financial crisis in a century has exposed the fragility of a monetary union without a fiscal and economic union. Even now, the euro area as a whole has lower deficit and debt levels than America; in theory the fire in the bond markets could be doused by fiscal transfers and the mutualisation of debt. But Europe is not a state and any hint of a transfer union is anathema to Germany and others. In a union of sovereign states the most disciplined members do not want to pay for the most reckless. So the response has been limited, often too slow and sometimes contradictory. Resentment on all sides is surging and governments in both camps are being weakened, whether for granting bail-outs or for accepting austerity.

Euro-zone leaders have pursued two objectives: first, rescue those on the brink of collapse, such as Greece and Ireland, with temporary loans (not grants); and second, try to impose Germanic rigour to prevent future crises. None of this has convinced the markets. Moody's this week downgraded Greek debt, and yields on Portuguese bonds are dangerously high. Caught between a clamour to do more to help the euro and her taxpayers' refusal to give more, Angela Merkel, the German chancellor, is seeking a grand bargain: in exchange for boosting the euro's defences, she wants tighter economic co-ordination of the euro zone along German lines.

Hence her competitiveness pact. In its original draft, the Franco-German proposal set out six objectives to be achieved within a year, among them abolishing wage indexation, raising pension ages, creating a common base for corporate tax and adopting constitutional “debt brakes”. All this was to be supervised by national governments, not the European Commission, the EU's civil service. There would be yearly summits at 17 or 17-plus—the euro zone plus any others that choose to join.

After denunciation from all sides, the latest version, as revised by José Manuel Barroso, president of the commission (who is disliked by Mr Sarkozy and Mrs Merkel), and Herman Van Rompuy, president of the European Council (often seen as too close to France and Germany), is less abrasive and more coherent. Now renamed the “pact for the euro”, it places the commission at its heart. It removes the overlap with existing plans for closer scrutiny of members' economic and budgetary policies. And it appoints the commission to supervise new commitments that are national prerogatives. It sets out broad areas of co-ordination—eg, keeping wages in line with productivity—but says the policy mix “remains the responsibility of each country”.

The wrong crisis?

Yet it is still fair to ask if the pact is aiming at the right problems. One cause of market turmoil is fear of contagion because of the fragility of Europe's banks. But Germany is cagey about new stress tests and reluctant to recapitalise its institutions. This blocks any sensible debate about restructuring Greek and Irish debt in the near term even though, confusingly, Germany insists that bondholders must in future bear more of the burden.

If competitiveness is the aim, why not push for a more ambitious deepening of Europe's single market, particularly in services? It is also a strange competitiveness pact that excludes some of the most open and competitive European economies, among them Britain, Poland, Sweden, Denmark and the Czech Republic. Perhaps the aim was never competitiveness, but rather the political appeal of a pact. Solemn yearly pledges from leaders are easier to sell than the commission's bureaucratic process.

Yet to get this, Mrs Merkel has struck a Faustian bargain with France's Nicolas Sarkozy. He does not care for her economic medicine, but wants a euro-zone “economic government” to restore lost French influence (one senior Eurocrat remarks that France needs Germany to disguise its weakness, and Germany needs France to disguise its strength). But as the pact is made more palatable to others, it may get less appealing to Mrs Merkel. And that may make her even more reluctant to open her purse.

The danger is that the pact may make the crisis worse. In the short term, a less-than-grand bargain could trigger a new bout of market nerves. In the longer term the pact may lead not to competitiveness but to divisiveness. What to do? Mr Tusk and others might end up joining the pact, if only to preserve the single market—Europe's biggest competitive advantage.